Tag Archives: low credit score

Consumers’ Credit Score Score

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photo by www.gotcredit.com

The Consumer Federation of America and VantageScore Solutions, LLC, released the findings from their sixth annual credit score survey. Their findings are mixed, showing that many consumers have a basic understanding of how a credit score operates, but that many consumers are missing out on a lot of how they work. They find that

a large majority of consumers (over 80%) know the basic facts about credit scores:

  • Credit scores are used by mortgage lenders (88%) and credit card issuers (87%).
  • Key factors used to calculate credit scores are missed payments (91%), personal bankruptcy (86%), and high credit card balances (85%).
  • Ethnic origin is not used to calculate these scores (believed by only 12%).
  • 700 is a good credit score (81%).

Yet, the national survey also revealed that many consumers do not understand credit score details with important cost implications:

  • Most seriously, consumers greatly underestimate the cost of low credit scores. Only 22 percent know that a low score, compared to a high score, typically increases the cost of a $20,000, 60-month auto loan by more than $5,000.
  • A significant minority do not know that credit scores are used by non-creditors. Only about half (53%) know that electric utilities may use credit scores (for example, in determining the initial required deposit), while only about two-thirds know that these scores may be used by home insurers (66%), cell phone companies (68%), and landlords (70%).
  • Over two-fifths think that marital status (42%) and age (42%) are used in the calculation of credit scores. While these factors may influence the use of credit, how credit is used determines credit scores.
  • Only about half of consumers (51%) know when lenders are required to inform borrowers of their use of credit scores – after a mortgage application, when a consumer does not receive the best terms on a consumer loan, and whenever a consumer is turned down for a loan.

Overall, I guess this is good news although it also seems consistent with what we know about financial literacy — people are still lacking when it comes to understanding how consumer finance works. That being said, it would be great if we could come up with strategies to improve financial literacy so that people can improve their financial decision-making. I am not yet hopeful, though, that we can.

Reiss on Low Credit Scores and Mortgages

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MainStreet quoted me in A Low Credit Score Does Not Prevent You From Purchasing a Home. It reads in part,

While consumers who have low credit scores have fewer options to choose from, many can still qualify for a mortgage.

Lenders determine the mortgage rate based on a potential homeowner’s credit score, amount of down payment and how much debt he has compared to his current income.

What Your Credit Score Means

Credit scores play a large factor in the interest rate a borrower will receive because lenders are determining the likelihood of someone defaulting on a loan or missing payments, said Jason van den Brand, CEO of Lenda, a San Francisco-based online home mortgage service.

“It’s important to remember that the costs of a loan are closely associated to how ‘risky’ it is to give the loan,” he said. “If you look like a riskier borrower, your loan will cost more.”

Low mortgage rates can play a substantial factor in a homeowner’s ability to save tens of thousands of dollars in interest. Even a 1% difference in the mortgage rate can save a homeowner $40,000 over 30 years for a mortgage valued at $200,000.

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Both an adjustable rate mortgage (ARM) or a Federal Housing Administration (FHA) mortgage are good options if homeowners are concerned about receiving a lower interest rate and have not been able to accumulate the standard 20% down payment.

The biggest benefit of ARMs is that they offer lower interest rates than the more common 30-year fixed rate mortgage and are good options for first-time homebuyers. Many ARMs are called a 5/1 or 7/1, which means that they are fixed at the introductory interest rate for five or seven years and then readjust every year after that, said David Reiss, a law professor at Brooklyn Law School.

FHA loans can be a good option, because they require a much smaller down payment of 3.5%.

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Given that young households tend not to have the savings for a substantial down payment, FHA loans can be particularly attractive, Reiss said.